1. The question referred by the Income-tax Appellate Tribunal, Bangalore Bench, for the opinion of this court, at the instance of the assessee is this:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the actual cost for the purpose of calculating development rebate under Section 33 no upward adjustment of Rs. 2,64,24,737 which the assessee had to bear as a result of devaluation of the rupee should be made ?'
2. The assessee, a resident shipping company, returned a loss of Rs. 13,31,088 for the assessment year 1967-68, claiming a development rebate of Rs. 7,32,79,891 at the rate of 40 per cent. on the cost of two ships after taking into account the effect of devaluation of the rupee on June 6, 1966. The ITO allowed development rebate to the extent of only Rs. 5,71,94,305 which alone, according to him, represented the development rebate on the actual cost of the imported ships on the ground that while Section 43A(1) of the I.T. Act provides for extra depreciation allowance on account of the effect of devaluation, there is no provision in the Act for allowing development rebate on the increased liability arising out of devaluation, and Section 43A(2) expressly forbids such a provision. The ITO decided to allow the development rebate of Rs. 5,71,94,305 in the year in which a reserve is created in view of the fact that in the year in question there was a loss.
3. On the assessee's appeal to the AAC, it was found that the ships in respect of which development rebate was claimed by the assessee had been purchased from a foreign country on January 25, 1966, and April 21, 1966, during the accounting year ending December 31, 1966. The original rupee cost of these two ships 'Chennai Penimai' and 'Chennai Ookkam' was Rs. 2,88,65,083 and Rs. 2,87,40,787, respectively. Due to devaluation of the rupee on June 6, 1966, the revised rupee cost of the ships came to Rs. 4,21,17,856 and Rs. 4,19,12,751. The AAC was of the view that Section 43A(1) applies where as a result of the change in the exchange rate there is an increase or reduction in the liability of the assessee in terms of the rupee to pay the price of any asset in foreign currency or to repay monies borrowed in foreign currency specially for the purpose of acquiring the asset, and that the section does not apply unless, (i) the asset is acquired, and (ii) the liability existed before the change in the exchange rate took effect, that Section 43A(1) restricts the allowance to depreciation, etc., and does not refer to Section 33 dealing with development rebate and that Sub-section (2) of Section 43A specifically excludes development rebate being allowed under Section 33 in cases where the cost of the assets has increased due to devaluation. The submission made on behalf of the assessee before the AAC was that even, apart from Section 43A, on general principles, extra liability incurred in respect of the capital assets has to be added to the cost of the assets. The AAC relied upon the decision in Sttbodhchandra Popatlal v. CIT : 24ITR566(Bom) and Southern Agencies Ltd. v. CIT : 45ITR602(Mad) and declined to accept the submission on the ground that general principles cannot be applied where special provisions are applicable. The agreement dated August 6, 1964, between the foreign ship building yard which built the two ships and the assessee provided for payment of 15 per cent. of the cost of the ships on the signing of the agreement and the balance of 85 per cent. in equal half-yearly instalments, the first of them commencing six months after the delivery of the ships, and also for the ship building yard having a right to negotiate with a first class German bank and/or banking syndicate to have credit for the 85 per cent, extended to it subject to the approval of the purchaser of the ships. In accordance with that clause in that agreement a loan agreement was entered into between the assessee and the consortium of West German banks with whom the ship building yard had entered into an agreement, and the consortium of West German banks disbursed the 85 per cent, of the cost of the two ships amounting to DM 94,095,000 to the ship building yard on January 25, 1966, and April 21, 1966, before the devaluation of the rupee took place. The AAC was, therefore, of the view that what remained at the time of the devalution was only the liability of the assessee to discharge its debt due to the consortium of West German banks and not any portion of the price of the ships and thatthe increased liability due to devaluation of the rupee cannot be added to the original cost of the ships for the purpose of claiming development rebate. In that view, the AAC dismissed the assessee's appeal.
4. In the assessee's further appeal to the Tribunal it was found that the assessee's system of accounting is mercantile. The cost of the fleet of ships of the assessee referable to the payment up to December 31, 1965, was shown in the balance-sheet of the assessee-company as on December 31,1965, as Rs. 2,76,71,863. But in the balance-sheet as at December 31, 1966, the additions to the fleet were shown as Rs. 18,31,99,728 on the ground that due to the devaluation of the rupee the assessee's liability to the consortium of the West German banks for the ships acquired before the date of devaluation had gone up by Rs. 3,92,16,681 and that the additional liability had been included as addition to the cost of the fleet. The Tribunal held that the increased liability to the consortium of the West German banks due to devaluation of the rupee, which took place after the two vessels had been acquired by the assessee, cannot be considered to be indirect expenditure laid out for the purpose of acquiring the assets and that though the actual cost of the ships would include the excess payable due to the devaluation of the rupee, there is a specific prohibition in Section 43A(2) of the Act against adopting the adjusted actual cost due to the devaluation for the purpose of development rebate allowable under Section 33 of the Act, and accordingly dismissed the appeal.
5. The facts established are that 15 per cent. of the total cost of the two ships had been paid by the assessee to the foreign ship building yard by the date of signing the agreement entered into between the foreign ship building yard and the assessee on 6th August, 1964, and credit for the balance of 85 per cent. had been given to the ship building yard by the consortium of West German banks with whom the ship building yard had entered into an arrangement in pursuance of the arrangement entered into for that purpose between the assessee and the consortium of West German banks. The payment of the entire cost of the two ships to the ship building yard had been completed on January 25, 1966, and April 21, 1966, and the ships had been acquired before the devaluation of the rupee took place on June 6,1966. The additional liability as a result of the devaluation had accrued to the assessee which had to discharge its debt to the consortium of West German banks incurred before the date of the devaluation for the purpose of acquiring the ships. It was conceded by the learned counsel for the revenue that on general principles the additional liability arising out of the devaluation of the rupee would become part of the cost of the ships as it had been done by the assessee in revising the cost of the fleet in the balance-sheet as at December 31, 1966, as Rs. 18,31,99,728 while it had been shewn in the balance-sheet as at December 31, 1965, as Rs. 2,76,71,863 as beingdue to the devaluation of the rupee and the consequent increase in the assessee's liability to the consortium of West German banks incurred for the acquisition of the ships before the date of the devaluation of the rupee.
6. Our attention was drawn to the decision of a Bench of this court in Addl. CIT v. Kwality Spinning Mills (Private) Ltd. : 109ITR646(Mad) , where the assessee's claim for development rebate was based on the fact that the actual cost of the machinery had increased by Rs. 48,342 consequent on the increase in the rate of exchange on the devaluation of the rupee, as the machinery was acquired before the date of the devaluation. The learned judges have observed that the effect of Sub-section (2) of Section 43A is to exclude the applicability of Section 43A(1) and, therefore, for the purpose of computing the actual cost of an asset for the purpose of deduction on account of development rebate under Section 33 the only statutory provision relevant is Section 43A(1), defining the expression 'actual cost'. The learned judges upheld the assessee's right to development rebate on the actual cost as defined in Section 43A(1) which admittedly included the sum of Rs. 48,342. That decision will not apply to the facts of the present case for, in that case, the actual cost of the machinery had increased due to the devaluation of the rupee even before the date of the acquisition, unlike the present case. The learned counsel for the assessee invited our attention to the decision of a Bench of the Gujarat High Court in I.T. Ref. No. 30 of 1975 [Arvind Mills Ltd. v. CIT--since reported in : 112ITR64(Guj) , where the question was whether the additional liability which the assessee incurred on account of the devaluation of the rupee in the midst of the relevant previous year in. relation to the repayment of the loan which it had borrowed for acquiring the imported machinery during the said year constituted an element in the actual cost of such machinery to the assessee for the purpose of allowing development rebate under Section 33. The learned judges answered that question in favour of the assessee. This decision also will not apply to the facts of the present case for, in that case, the increased liability on account of devaluation was within the contemplation of the parties as an integral part of the original transaction and it was held by the learned judges that the assessee must be held to have incurred such liability in respect of each instalment, no sooner it started drawing upon the loan account, since the assessee maintained its accounts according to the mercantile system. The learned judges have observed in their judgment (pp. 84, 85) that cases like the one before them:
'where the increased liability is in fact incurred prior to acquisition of the asset and it, therefore, becomes part of the cost of acquisition in its ordinary signification, are not within the ambit of the said section. The said section may be attracted in cases such as, for example, when an assessee maintains his accounts on cash receipt basis and the increased liability inrespect of repayment of instalments of purchase price or loan accrues or arises for the first time after the acquisition and installation of the asset.'
7. Section 33(1)(a) provides that in respect of a new ship which is ownedby the assessee and is wholly used for the purposes of the business carriedon by him, there shall, in accordance with and subject to the provisions ofthis section and of Section 34, be allowed a deduction in respect of the previousyear in which the ship was acquired, a sum by way of development rebateas specified in Clause (b). According to Clause (b), in the case of a ship, the development rebate shall be forty per cent, of the actual cost thereof to theassessee. According to Section 43, in Sections 28 to 41 and in that section, 'actual cost' means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly byany other person or authority. Section 43A(1) lays down that:
'Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in Clause (1) of section 43 or the amount of expenditure of a capital nature referred to in Clause (iv) of Sub-section (1) of section 35 or in Section 35A or in Clause (ix) of Sub-section (1) of Section 36 or, in the case of a capital asset (not being a capital asset referred to in Section 50), the cost of acquisition thereof for the purposes of Section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid.' The Sub-section restricts the effect of devaluation to, (1) the expenditure of a capital nature on scientific research related to the business carried on by the assessee covered by Section 35(1)(iv); (2) expenditure on acquisition of patent rights or copyrights covered by Section 35A ; (3) expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees covered by Section 36(1)(ix); and (4) capital asset (not being a capital asset referred to in Section 50) the cost of acquisition thereof for the purpose of Section 48. Section 50 deals with a capital asset in respect ofwhich a deduction on account of depreciation has been obtained by theassessce in any previous year either under the I.T. Act, 1961, or the IndianI. T. Act, 1922, or under executive orders issued when the I.T. Act (II of1886) was in force. Section 48 relates to the mode of computation ofincome chargeable under the head 'Capital gains'. But Section 43A(2) specifically lays down that: .'The provisions of Sub-section (1) shall not be taken into account incomputing the actual cost of an asset for the purpose of the deduction on.account of development rebate under Section 33.' Therefore, it is clear that the legislature has clearly intended not to takethe variation in the cost of acquisition of an asset arising out of the.devaluation of the rupee for the purpose of granting development rebate under Section 33 of the Act. In these circumstances, we are of the opinion thatthe general principles, according to which the increase in the cost of theasset arising out of devaluation of the rupee must be treated as part of thecost of the asset, cannot be applied for the purpose of granting develop-ment rebate under Section 33 of the Act in view of the definite provision againstit in Section 43A(2) of the Act, referred to above. ' Accordingly, we hold that the Tribunal was right in holding that incomputing the actual cost for the purpose of calculating developmentrebate under Section 33 no upward adjustment of Rs. 2,64,24,737, which theassessee had to bear as a result of the devaluation of the rupee, should bemade and answer the question in the affirmative and against the assesseeand in favour of the revenue. The assessee will pay the costs of therevenue. Advocate's fee Rs. 250.
8. A copy of this judgment under the signature of the Registrar and theseal of this court shall be forwarded to the I. T. A. Tribunal concerned.